Question

Problem 16-14
Cash Budgeting

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $5,000 per month, and the rent is $2,300 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $850, but Koehl has agreed to maintain an average bank balance of $4,500 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $110,000.

	Sales		Purchases
December	$120,000		$35,000
January	42,000		35,000
February	62,000		35,000

1. Prepare a cash budget for December, January, and February.

   I. Collections and Purchases:
   	December	January	February
   Sales	$ 120,00	$ 42,000	$ 62,000
   Purchases	$ 35,000	$ 35,000	$ 35,000
   Payments for purchases	$ 110,000	$ 35,000	$ 35,000
   Salaries	$ 5,000	$ 5,000	$ 5,000
   Rent	$ 2,300	$ 2,300	$ 2,300
   Taxes	$ 12,000	---------	---------
   Total payments	$ 129,300	$ 42,300	$ 42,300
   Cash at start of forecast	$ 850	----------	---------
   Net cash flow	$ -9,300	$ -300	$ 19,700
   Cumulative NCF	$ -8,450	$ ______	$ _____
   Target cash balance	$ 4,500	$ 4,500	$ 4,500
   Surplus cash or loans needed	$ -12,950	$ ______	$ ______

Please note: I have tried the below answers which are incorrect:

1) Cumulative NCF - For January -300 & February 19,700

Cumulative NCF - For January -13,250 & February 1,950

2) Surplus cash or loans needed - For January -4,800 & February 15,200

Surplus cash or loans needed - For January -17,750 & February 2,550

Answer 1